UK SMEs face calls for mandatory climate disclosure

As reported by Raconteur, the UK government contemplates extending mandatory emissions reporting to SMEs, crucial players in the country’s net-zero ambitions, as voluntary efforts fall short. Emissions reporting is hailed as a potential game-changer, but concerns linger about the feasibility for resource-strapped small businesses

In 2022, The Companies Act 2006 was amended to legally require the biggest UK firms – those with 500 or more employees and £500m in turnover – to disclose sustainability-related information in their annual strategic reports. This amendment now covers more than 1,300 of the largest organisations in the UK economy and instructs them on how to declare their climate action strategy.

Legislation like this seems to make a difference. Research shows that there has been a decrease in climate emissions from companies since carbon reporting requirements were introduced in the UK in 2013.

The UK government has spoken about extending mandatory disclosure to the rest of the UK economy. Currently, there is no emissions-reporting mandate for UK SMEs, which make up the vast majority of the UK economy. The government has previously called on small businesses to lead the charge for net zero, but more must be done if the UK is to meet its net-zero target. The government has previously signalled its intention to roll out mandatory emissions reporting standards across the entire economy by 2025.

Compliance with emissions reporting requirements

A significant proportion of SMEs are already attempting to reduce their climate impact voluntarily. For instance, the majority of UK B Corps – companies recognised by B Lab, a non-profit, for their social and environmental impact – are firms with fewer than 250 employees. Matthew Cotton, professor of public policy at Teesside University, confirms that businesses of all sizes are increasingly committed to emissions reduction and sustainability.

But there are segments of the small-business community that could undoubtedly improve their sustainability efforts. Recent analysis suggests that 76% of UK-based, VC-backed startups have done nothing to combat climate emissions. And despite their voluntary efforts, SMEs still contribute roughly 44% of total non-household emissions in the UK.

Trevor Hutchings, sustainability partner at consultancy BIP, points out that businesses falling under the SME banner are not a homogeneous group. They can range from family-run, micro-SMEs to organisations with millions of pounds in turnover and hundreds of employees.

As carbon emissions accounting and reporting can be complicated and expensive, there is a concern that the burden would be too much for small businesses to manage.

Compliance is a resource-intensive task, potentially requiring significant amounts of financial and human capital; resources that many SMEs may not be able to spare. For legislation to be effective, it would need to be nuanced and to carefully consider the burden imposed on businesses, stresses Hutchings.